On equality and taxes

John Rawls famously argued that any unequal distribution of social goods can only be justified if it benefits the worst off. Utilitarians argue that the marginal utility of resources rapidly declines after reaching a certain, quite moderate, level of wealth. Social psychologists have for more than a decade argued that unequal distribution of resources corrode social cohesion, general happiness and public health. The moral and empirical case for reducing inequality, and not only poverty, is thus significant.

Reducing inequality can mainly be done in two ways: either by imposing regulation or social stigma on income differences and great wealth, as in Japan, or by taxation, as in most European countries. This blog has mainly advocated the latter. In Sweden, one of the most equal liberal democracies in the world, the tax rate for incomes over roughly 50 000 € is 57%. This steep progressiveness has contributed immensely to keep inequality at a moderate level. While the evidence from economists that greater equality hampers economic growth remains uncertain, the moral and empirical case for greater equality has never been stronger. European governments could and should be more bold.

Sweden’s leading liberal op-ed, Dagens Nyheter (DN), disagrees. They argue that taxes of more than 50% corrupts the relation between the government and the citizens. This assertion is quite bold, and requires some further argumentation. This claim masks as an argument to reduce the overall tax burden, a notion that is much more plausible than the idea that taxation should not be used to mitigate the harmful effects of inequality. And the notion that ”normal” citizens are being taxed to their bones is simply not true. People paying the top rate of income tax are upper middle class and the most wealthy. These people enjoy already longer and happier lives, and a range of social benefits, most notably almost 10 years of longer pension than the poorest 10% and heavy subsidies for their cultural preferences. Although DN claims to be in favor of equality, they would like to cut taxes for the richest earners. This seems contradictory to me. Surely, someone that promotes expensive tax cuts for the richest earners could not be serious in really wanting to reduce inequality.

This blog has previously argued that income taxation should be more steep and progressive. On incomes over 80 000 €, taxes should be 70%, on incomes over 160 000 € 80%, on incomes over 320 000 € 90% and on incomes over 640 000 € 99%. This means de facto that the top income tolerated in Europe would be 640 000 € per annum. Although this would still leave room for some inequality, it would limit the worst excesses. These taxes would certainly not be enough, as the richest people have certain ways of evading hefty taxation. Income taxes would have to be complemented on taxes on high-value properties, such as large estates, and other major assets, such as private aircraft, yachts and cars. The latter assets, being harder to pin down than housing and land, ought to be registered in the country where being used the most. The current crackdown on tax havens should of course be intensified, and more money should be allocated to authorities that track tax evaders and delinquents.

The arguments against this tax reform seem increasingly feeble. The purpose of taxing the richest is not to balance the budget, but to reduce inequality. Thus the argument of a broad and reliable tax base is misguided. The notion that steep taxation would drive away talent is more plausible. However, the financial crisis has shown that the legendary ”talent” of corporate bosses and bank managers were largely an illusion. These people are not super humans, impossible to replace. There is ample supply of gifted young people that are willing to do their job at much more moderate after-tax incomes. Would steep taxation squelch innovation and creativity? Perhaps, but it is highly uncertain. With low corporate taxes, innovation could still be promoted. And the notion that the desire for great wealth is necessary to promote innovation is highly controversial. High tax countries, such as Scandinavian countries, Germany and Japan are highly innovative.